reporting of fmg, page-6

according to Fosters....

Top Picks.

Fortescue Metals (FMG, $3.50, Mkt cap $10.9B). Fe Spot climbs a A$140/t makes for healthy margins. Trading Buy.

•Last week we highlighted the potential for the Iron Ore (Fe) spot price to continue to appreciate on an AUD basis, providing margin improvement to the producers. We favour FMG as the best pure play exposure to Iron Ore (Fe) as the miners will start to benefit in the September quarter.

•The improving US economy, rising bond yields, and a less bullish outlook for Australian economic growth have transpired in pushing our dollar down to US$0.90. Despite the basket of commodities experiencing price volatility as result of a downgrade in China growth, we are now forming a bullish near-term view on the Fe producers such that for Fe it has mostly been mitigated by a fall in the AUD and a gradual uptick in the price.

•The Bloomberg chart below highlights while the China 62% CFR Fe price benchmark has rebounded off its recent low of US110/t to close yesterday at US126/t. In AUD terms this is now converts to a AUD139/t, and noticeably where it last traded in March this year and FMG was trading at a healthy $5 vs $3.50 last close.

•Concerns over the company’s debt position and market scepticism of a sell-down of the infrastructure assets have added to pressure on the share price. We think the negativity is currently factored in at current levels and view the stock is a Trading Buy.

•Yesterday’s China GDP result in line at 7.5% is a timely reminder that while it is slowing there is no fall from a cliff, and sufficient growth to warrant continued supply of Fe at sustainable levels at reasonable prices.

•Also supporting the Fe market will be the potential decision of RIO to delay their proposed ‘360 project’ and focus on capital returns vs another $5B of capital spend on Fe expansion projects. Watch for an update from RIO in today’s quarterly update. Should RIO pull back expansion you might also see BHP with a similar message. This would be a positive for FMG as it seeks to ramp up to 155Mt.

•The FMG quarterly should have no major surprises given the June management update was detailed; however watch for signals on the TPI sale process and possible capex variations on growth projects to provide savings

http://www.fostock.com.au/announcements/fortescue-metals-fmg-asx